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Low Rates Fueling Risk in Norway

Norway’s financial watchdog warned that record low interest rates are fueling excessive risk taking as the central bank seeks to save the economy from a recession.
The regulator is sounding the alarm amid signs the nation’s housing market is cooling from a boom that has driven housing prices up 80% over the past decade and pushed household debt levels to twice disposable incomes. Yet house prices are now easing, and fell 1.2% nationwide last month, Bloomberg reported.
“It’s too early to tell if this is a flattening of house prices, which is what we hope for and would be the best outcome for the Norwegian economy–a soft landing–or whether this is a turning point which could at worst lead to a severe decline in house prices, or a crack,” Morten Baltzersen, head of Norway’s Financial Supervisory Authority, said in a Nov. 16 interview.
Baltzersen said that the general picture is still that high debt growth is persisting, with the main driving force being low rates. This puts “macroprudential tools” at the “top of the agenda,” he said.
His comments come as the central bank is preparing its next monetary policy move. The bank held rates unchanged this month after in September cutting to a record low of 0.75%. Governor Oeystein Olsen said in a speech Tuesday that low rates and a weak krone have helped stimulate the economy, suggesting he’s not ready to pull on the break anytime soon.
The economy, excluding output from oil, gas and shipping, expanded 0.2% in the third quarter, helped by rising exports tied to a drop in the krone. Consumer spending was little changed, indicating the economy is losing support from households amid the highest unemployment in 10 years.
The bank has so far not provided an update to a signal in September that the rate will be cut again in “the coming year.” Deputy Governor Jon Nicolaisen said last week that the bank is prepared to cut further and that there was nothing “very dramatic” going on in the housing market right now.
“We are watching the developments in the credit markets and property markets closely, of course we are aware that interest rates could decline further,” said Baltzersen.